Dec 20, 2021 - Economy

Purdue Pharma's ripple effect on bankruptcies

Bottles of Purdue Pharma OxyContin medication.

Bottles of Purdue Pharma OxyContin medication. Photo: George Frey/Getty Images

A federal judge’s decision to reject Purdue Pharma’s multibillion-dollar opioid settlement shines a light on a controversial part of bankruptcies that quietly helps grease the wheels for complicated reorganizations.

Catch up fast: At issue are “non-debtor releases” provided to Purdue's owners, the Sackler family.

  • U.S. District Judge Colleen McMahon said the releases — agreements that shield the family from future litigation — can’t legally be granted by a bankruptcy court.

Why it matters: If the Supreme Court (where the case may ultimately be headed) decides these releases aren’t allowed, a key part of bankruptcy sausage-making disappears. That means that complex deals involving multitudes of brawling creditors may be even harder to hammer out.

State of play: The Sacklers are contributing $4.5 billion as part of a deal for Purdue to reorganize and emerge from bankruptcy with new owners and a different name. Those billions will go toward resolving existing litigation and to communities fighting opioid abuse — in exchange for the releases.

  • Releases like these also drew ire in the bankruptcies of Boy Scouts of America and USA Gymnastics — two cases that similarly stemmed from massive legal liabilities the organizations couldn’t afford.
  • In the bankruptcy world, releases are not uncommon as a way to encourage investors to contribute funds toward the reorganization — but critics say it’s a way for those investors to stamp out their legal liability without filing for bankruptcy themselves, as Reuters reports.

"This, if it stands, will completely upend Chapter 11 practice. It effectively takes non-debtor releases off the table,” Lindsey Simon, an assistant law professor at the University of Georgia's law school, tells Reuters, of McMahon’s ruling.

  • A group of Democratic Senators also want to all but do away with non-debtor releases: it’s in a bill they proposed earlier this year.

The bottom line: Releases can feel ethically murky, but they're part of the machinery that allows companies to emerge from bankruptcy faster, and prevents the value destruction that years of litigation can cause.

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